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When ABC was trading at $52 per share, you paid $6.40 for a call option (for one share) on the stock of ABC with a strike price of $50, and six months until maturity. After six months, the share price of ABC is $54.10.What is the value of the call option at expiration? Do not include the $ sign and answer to the nearest $0.01.

Question

When ABC was trading at 52pershare,youpaid52 per share, you paid 6.40 for a call option (for one share) on the stock of ABC with a strike price of 50,andsixmonthsuntilmaturity.Aftersixmonths,thesharepriceofABCis50, and six months until maturity. After six months, the share price of ABC is 54.10.What is the value of the call option at expiration? Do not include the signandanswertothenearest sign and answer to the nearest 0.01.

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Solution

The value of a call option at expiration is determined by the difference between the stock's market price and the option's strike price, as long as the market price is higher. If the market price is lower, the option is worthless because it would be cheaper to buy the stock directly from the market.

In this case, the market price of ABC is 54.10andthestrikepriceis54.10 and the strike price is 50. Therefore, the value of the call option at expiration is 54.1054.10 - 50 = $4.10.

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